Highest pace in a year, but economists were expecting even better

Canada's economy grew at an almost three per cent pace last quarter. (Jonathan Hayward/The Canadian Press)

Canada's gross domestic product was essentially flat in June but expanded at a 2.9 per cent pace in the spring, slightly less than economists expected.

Statistics Canada reported Thursday that exports surged between April and June to their biggest increase in four years.

Exports of energy products were especially strong, growing by 3.6 per cent. Household spending rose by 0.6 per cent, about twice the first-quarter gain. Spending by businesses, however, slowed down and only grew by 0.4 per cent during the second quarter.

"If there is a dark spot in the report, it has to be business investment," Toronto-Dominion Bank economist Brian DePratto said after the numbers were released.

A slowdown in business spending was to be expected after a strong start to the year, "but this component is definitely one to watch carefully going forward," he said.

The 2.9 per cent pace of growth in the overall economy was the strongest performance in a year, but economists had been expecting the figure to come in even higher, at 3.1 per cent.

That led to a slight pullback in the loonie, which lost a third of a cent after the numbers came out as investors digested the slight disappointment.

In comparison, the U.S. economy grew at a 4.2 per cent pace during the same period.

While strong, the figure probably won't be enough to convince the Bank of Canada to raise its benchmark interest rate next week to cool the economy.

"For the Bank of Canada, it likely required a blowout upside surprise today to even get them to consider a rate hike next week, and instead we got a very mild downside surprise," Bank of Montreal economist Doug Porter said.

Trading in investments known as rate swaps implies there's slightly less than a one in five chance of a rate hike next week. The odds jump to three in four of seeing one the following month, in October.

"The [second quarter] economic performance was pretty much bang on Bank of Canada expectations," DePratto said, "and so there is little reason for them to alter the path of their policy interest rate."

"Provided there are no big shocks on the NAFTA front, we continue to circle the Oct. 24 decision date as the most likely time for the next rate hike," Porter said, referring to North American Free Trade Agreement talks now going on in Washington.